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The Jones Company is looking to make an investment in some shares and other investments to diversify their portfolio. They are interested in the following

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The Jones Company is looking to make an investment in some shares and other investments to diversify their portfolio. They are interested in the following two stocks and have been able to determine their expected returns based on the expected different states of the economy. State of Economy Probability ABC Company DEF Company Expected Return Expected Return 28% 13% 0.25 Very Good Good 0.25 15% 9% 0.30 7% 5% 0.20 -7% 0% Average Poor Expected Return Variance 11.45% 7.00% 0.002100 A) Calculate the variance of the returns of ABC Company. (3 Marks) Please provide your answer as a decimal to 6 decimal places. Answer: B) Calculate the covariance of the expected returns of ABC Company and DEF Company: (3 Marks) Please provide your answer as a decimal to 6 decimal places. Answer: C) There is no relationship between the correlation and covariance of two stocks in a portfolio? (2 marks)

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